A belated comment about electricity markets, which I suddenly realised when I was reading the FT magazine recently. Tim Harford wrote a piece in the Undercover Economist called 'Don't Judge a Book By Its Cover Price'. The article was about amazon and computer pricing models, but he mentioned the problems of price transparency.
As JLF Bertrand pointed out in the nineteenth century, is two companies are offering an identical product and have transparent pricing, then rational customers will just go to the one that is the cheapest. This will lead to a race to the bottom in terms of pricing, until the price is at, or just above the cost of production. This surely highlights a reason why electricity pricing is far from transparent. The more complicated each company makes its products, the harder it is for customers to compare, and then move to the competition.
Bertrand's argument was too simple, however. While a cartel would be illegal, imagine if the competing companies understand this model and find a way to raise prices between themselves, or just never start the price competition in the first place. In fact, it would be entirely irrational to start undercutting your competitor, as you know where it ends - zero profit for everyone.
Which makes me wonder which way electricity prices are heading.
I don't agree that that is what rational customers will always do.
ReplyDeleteOther considerations might include:
One company being more ethical than the other.
Or might have a better reputation for reliability
Or might have a better support service
Or one might choose to support local businesses
Or avoid a company whose behaviour in some way you dislike (for example, Apple pursuing patent litigation which has a negative impact on product development, and is arguably hypocritical because Apple's products are built on the back of the products of other companies, such as Xerox)
A business model based solely on price is over simple. On the other hand, a price structure that seeks to confuse and obfuscate so that the purchaser is unable to make an informed decision is theft/fraud...no more and no less.
Sorry to take so long to respond Pollik. I think I should have said 'rational' customers, as what these old economic theories used to assume is that customers are only rational when price is the main determinant is choosing between services or products. Obviously the real world has shown how wrong these early theorists were - the worrying thing is how pervasive their ideas have been. So you are entirely right about other considerations. I get my electricity from Good Energy because they are 100% renewable. Price doesn't come into it.
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